NSF’s circumvention of Bayh-Dole in cooperative research centers

Bayh-Dole positions the “preference” for United States industry as the most important provision of the law, asserting precedence over any other part of Bayh-Dole (see 35 USC 203). Bayh-Dole requires owners of subject inventions to require certain exclusive licensees to use American-made product. But Bayh-Dole’s provision turns out to be almost useless in practice, since it is limited to an odd licensing scenario–an exclusive license in the United States to use or to sell–and the requirement then doesn’t apply to owners of subject inventions directly, nor to non-exclusive licensing, nor to exclusive licenses outside the United States (so, no requirement to prefer to export US-made products). Even so, Bayh-Dole’s preference for United States industry figures in Bayh-Dole’s statement of policy and objective (35 USC 200):

to promote the commercialization and public availability of inventions made in the United States by United States industry and labor

And Senator Bayh in introducing S. 414 in the Senate made American technology leadership the cornerstone of his reasoning for why Bayh-Dole was needed. What’s the point of sponsoring inventions if those inventions are all exclusively licensed to foreign companies who then import their licensed products into the United States? How the heck does doing that advance American industry or technology leadership?

We might note, then, that when the NSF all but forces the universities hosting cooperative research centers to grant each industry member a non-exclusive license to any inventions that get made by the center, the NSF is also requiring universities to avoid the “manufactured substantially” requirement.

Look–here’s how NSF does it. First, NSF publishes template agreements for use by universities seeking to host a CRC. The university has to adopt one of those template agreements for its proposal to be competitive for funding. “We don’t force you to do it this way–you are smart enough to choose to do it this way.” Something right out of The Godfather.

Second, the NSF buries in the template agreement that the university and each industry member will agree that the university must own any inventions made in CRC work.

All patents derived from inventions conceived or first actually reduced to practice in the course of research conducted by the CENTER shall belong to UNIVERSITY. UNIVERSITY will take such action as is necessary to ensure that it has ownership of all patents developed from this work, and shall be responsible for ensuring compliance with chapter 18 of title 35 of the United States Code, commonly called the Bayh-Dole Act.

Thus, the NSF doesn’t turn Bayh-Dole into a vesting statute but instead as a condition of the university’s proposal, the university has to agree with members of the CRC that it will take ownership of patents–and that it will *agree* to “be responsible for ensuring compliance with the . . . Bayh-Dole Act.”

Of course, the NSF here has things wrong–and makes universities agree with industry on this wrongness as a condition of getting federal funding. Bayh-Dole concerns ownership of inventions, not specifically patents. And Bayh-Dole does not dictate that universities must own inventions–they can not acquire inventions and then Bayh-Dole doesn’t apply, or they can acquire inventions and then choose not to retain title–the government then has to determine whether it will request title. But the NSF apparently cannot imagine a scenario in which a university hosting a CRC would decline to elect to retain title–perhaps because no industry members are willing to pay their share of the patenting costs for that invention. Thus, the NSF makes it happen that the university is required to contract with companies such that it cannot choose not to acquire title and having acquired title it cannot choose to not retain that title–despite Bayh-Dole providing outright that the university does have this right (35 USC 202(a)) and despite the NSF in its lazy way drafting template language that makes the university have to agree to “enforce” Bayh-Dole. There’s an element of reason in the NSF requirements–that’s one way to handle a CRC, and there’s something to be said in the bureaucratic mind for having every CRC handle inventions the same way–an arbitrary way–regardless of the industry, the technology, and the objectives of the research. But that little bit of reason is wrapped in a lot of nonsense, and non-compliant (shall we say, uh, contrary to law) nonsense at that.

The university in receiving federal funding agrees to the patent rights clause–it does not have any obligation to “ensure compliance” with Bayh-Dole, and indeed the expectation that it will “ensure compliance” is outside Bayh-Dole, even forbidden by Bayh-Dole unless the NSF makes the effort to determine exceptional circumstances. The whole point of NSF’s end run here is to circumvent Bayh-Dole’s requirements rather than comply with those requirements itself. It is then ironic that the NSF makes universities agree with industry members to do something that Bayh-Dole itself does not allow without a formal procedure to justify a deviation from the standard patent rights clause.

And then NSF requires the non-exclusive licensing:

UNIVERSITY agrees that all CENTER members are entitled to a nonexclusive royalty-free license. COMPANY will have the right to sublicense its subsidiaries and affiliates. COMPANIES that wish to exercise rights to a royalty-free license agree to pay patent application and maintenance costs.

Of course, the royalty-free license isn’t technically royalty-free–the companies have to pay the patenting costs. But we have here the NSF “marching in” on the university’s rights under Bayh-Dole–and doing so up-front, before any invention has been made, acquired, or disclosed by the university. Again, the NSF does this by circumventing Bayh-Dole. It makes the university choose to agree to this requirement with whatever companies might join the CRC–as a condition of getting funded. Thus, although ownership and granting licenses is within scope of Bayh-Dole’s standard patent rights clause, and Bayh-Dole provides the required procedure by which a federal agency may alter the standard patent rights clause, the NSF ignores that. Instead, it makes the change on the proposal side of the deal, not the federal side of the deal–even though the proposal side necessarily becomes part of the patent rights clause that ends up contractually binding in the funding agreement.

Ah, you might think–how could a CRC operate any other way? Well, if that’s your thought, then why does the NSF have to compel university ownership of inventions and compel the university to license non-exclusively to each member, and restrict the terms of the license to paying a pro rata share of the cost of filing patent applications and maintaining issued patents? If that’s what has to happen, then there’s no need to require it, even in a proposal.

And, of course, what the NSF requires is not the only way one might operate a CRC with industry. Perhaps the university does own all inventions–but industry members pay a membership fee to participate in the CRC, so the patenting costs could come out of that fee rather than be charged out separately on a pro rata basis to industry members. Do you realize how frickin’ difficult it is to figure out what the pro rata portion of each legal bill might be, what with members coming and going over time? The NSF is so clueless about this–but it sure sounds okay on paper.

Do you realize, too, how making small companies pay a pro rata share of each patent application spread across potentially many foreign patent applications can make it impossible for small companies to afford to participate? Let’s say there’s a CRC starting out with 20 industry members, and one of them happens to be an unlucky small company. In the first year, the CRC produces ten inventions and the university files patent applications on each, with a PCT application to follow. That’s on the order of $150K in patenting costs right there. When those PCT applications have to be converted to national phase applications, there will be another $500K or more in legal bills. To stay in the CRC and expect to have a “royalty-free” license to each invention, the small company will have to come up with some $30K. Makes no sense.

In its way, the NSF requirements violate Bayh-Dole’s statement of policy at 35 USC 200–“to use the patent system . . . to encourage maximum participation of small business firms in federally supported research and development efforts.” To encourage maximum participation by small companies, the patenting costs should come out of the pot of membership fees paid by all industry members, and the members should decide what is more important–patenting a bunch of things or getting more research done.

Ownership of inventions could be placed in a third party, such as a standards organization, for instance. Inventions could be owned by their inventors, with a requirement that the inventors grant all participants a license on FRAND terms. Or, when anyone is recruited to conduct research in the CRC, they indicate the terms on which they will make their inventions available–they might say that they will not seek patents on any of their inventions, or they might say that they may seek patents but will license to everyone, not just CRC members, on a FRAND basis. There’s any number of variations, and depending on the industries involved, and the target technologies involved, and the objectives, any one of these variations might be a whole lot better than the NSF-required cookie cutter template.

We see then that the NSF, by requiring universities to license non-exclusively to receive funding for cooperative research centers, ensures that Bayh-Dole’s “manufactured substantially” clause never comes into play because no licensee will ever receive an exclusive license in the United States to use or to sell. Not only that, but the NSF by requiring non-exclusive licensing has invoked march-in without following the procedures required by Bayh-Dole’s regulations–neither determining exceptional circumstances to modify the standard patent rights clause nor following the march-in procedures to determine that a condition for march-in has been met.

The NIH clearly is not so clever as the NSF. If they were, they would use the same dodge around Bayh-Dole for research tools. Grant applicants could propose whatever they wanted, but if they didn’t propose making research tools available on a non-exclusive royalty-free license (but for a pro rata share of patenting costs or whatever), then the applicants can kiss their funding goodbye. Instead, the NIH just begs people to do the right thing. Silly NIH–why not just circumvent and undermine Bayh-Dole like your more clever STEM folks at the NSF?

Of course, we are still left with the monopoly meme. According to the monopoly meme, if an invention is available to all, then no one will develop it or use it. If that is the case (it’s not–the monopoly meme is mostly nonsense), then the NSF’s CRC requirement for non-exclusive licenses doom any invention made in the CRC research. It is then waste effort for the university to secure patent rights, and it is waste effort for companies to have to pay for a non-exclusive license, and it is waste effort for anyone to document these wasted efforts to the federal government.

Furthermore, given that the NSF cannot imagine the situation in which the university and companies say “screw this” with regard to patenting for no good purpose, the NSF has no apparatus for itself complying with Bayh-Dole and requiring assignment to the NSF of all those inventions that are to be wasted because the NSF insists that the university make the inventions available non-exclusively. What’s the NSF going to do if it does take ownership of these inventions that industry members don’t want to pay for? Is the NSF going to file patent applications on its own, paying with federal money? Is the NSF then going to follow its own requirements and offer the patents for license non-exclusively for a pro rata share of the patenting costs? If so, then why the heck doesn’t the NSF just offer to pay for all the patenting the university plans to do, and do the licensing itself? And if the NSF is not going to patent anything, then why make the university patent stuff? And if the NSF plans to license exclusively inventions arising in a CRC, then why make the university license non-exclusively, and on such arbitrary and cruddy terms?

At some point, one grows weary of government officials with a bee up their butt about patent policy dictating how things need to be. Bayh-Dole is a pile of cruddiness. Vannevar Bush’s approach–at least for university-hosted research–is still vastly superior. The government gets a royalty-free license, and that’s all it ever needs. No disclosing, no electing, no patenting, no reporting, no march-in, no nothing else. Bayh-Dole is like a sucker punch for faculty inventors, a way around Dubilier that makes it a virtue to have a bureaucrat’s thumb in every research invention pie.

Now, having worked through all this, there’s one last point to make. From the perspective of the monopoly meme, non-exclusive licensing before development means the death of the invention and a great loss to the public. Each invention must be developed with private money, and private money must only be made available if there’s a patent monopoly on offer. But the NSF all but requires non-exclusive licensing before commercial development, and does so by circumventing Bayh-Dole. It makes sense to do so. The monopoly meme, for almost all new science and technology, nonsense. If the true purpose of Bayh-Dole is to enforce the dealing in patent monopolies prior to development as a means of ensuring development only takes place with a single organization’s speculative financing, then it makes sense for almost everyone to avoid Bayh-Dole, to circumvent it, to undermine it.

The NSF’s compulsory non-exclusive licenses are dopey but the general idea is sound. Basic science and early stage engineering to demonstrate really new stuff can be managed best as a commons or ad hoc standard or library of techniques. A new engineered product might involve 50 or 300 or more inventions–if these each must be held separately until developed as a stand-alone product, we wait forever, or at least the two decades until the patents on these inventions expire.

No–rather, most industries have figured it out that they need a robust commons of public domain, cross-licensed, standardized, interoperable resources by which to prosper and compete. The intellectual property that plays a role in that competition is primarily brand and trademark, and a thin edge of what is called “nonessential” rights–rights not essential to the practice of the common or standard technology. The so-called patent trolls aim to disrupt the emergence and development of commons or standards by patenting and refusing to dedicate their patents to a standard–the trolls, naturally enough, want to get paid. The only difference between a university licensing office troll and a hardened commercial troll is that the university licensing office puts it out there that they are being virtuous and public spirited about it rather than just being in it for what they can get out of it financially.

The advocates for Bayh-Dole end up in a logical tar pit. If the true purpose of the patent system is to create private monopolies to be exploited for maximum profit–this, the necessary incentive to spend money at all–then the NSF cooperative research programs with their enforced non-exclusive licensing must be shut down. If on the other hand, the NSF is right, that “early stage” stuff needs to be developed in common, then Bayh-Dole’s whole apparatus assuming dealing in exclusive licensing is draining research ideas away from participating in cumulative technology, emerging commons, standards. Bayh-Dole then is something of a tick sucking energy out of research physiologies and inserting a screwball monopoly meme virus that only a select set of patent attorneys and the bio-chemical industry that depends on patents could love.